MEDMAL DIRECT INSURANCE COMPANY

Transcription

1 REPORT ON EXAMINATION OF MEDMAL DIRECT INSURANCE COMPANY JACKSONVILLE, FLORIDA AS OF DECEMBER 31, 2013 BY THE FLORIDA OFFICE OF INSURANCE REGULATION

2 TABLE OF CONTENTS LETTER OF TRANSMITTAL... - SCOPE OF EXAMINATION... 1 SUMMARY OF SIGNIFICANT FINDINGS... 2 CURRENT EXAM FINDINGS... 2 PRIOR EXAM FINDINGS... 3 SUBSEQUENT EVENTS... 3 HISTORY... 3 GENERAL... 3 DIVIDENDS TO STOCKHOLDERS... 4 CAPITAL STOCK AND CAPITAL CONTRIBUTIONS... 4 SURPLUS NOTES... 5 ACQUISITIONS, MERGERS, DISPOSALS, DISSOLUTIONS, AND PURCHASE OR SALES THROUGH REINSURANCE... 5 CORPORATE RECORDS... 5 CONFLICT OF INTEREST... 5 MANAGEMENT AND CONTROL... 6 MANAGEMENT... 6 AFFILIATED COMPANIES... 7 ORGANIZATIONAL CHART... 7 SERVICE AGREEMENT... 8 FIDELITY BOND... 8 PENSION, STOCK OWNERSHIP AND INSURANCE PLANS... 8 TERRITORY AND PLAN OF OPERATIONS... 8 TREATMENT OF POLICYHOLDERS... 9 COMPANY GROWTH... 9 PROFITABILITY OF COMPANY...10 LOSS EXPERIENCE...10 REINSURANCE...11 ASSUMED...11 CEDED...11 ACCOUNTS AND RECORDS...12 CUSTODIAL AGREEMENT...13 LEASE AGREEMENTS...13 INFORMATION TECHNOLOGY AGREEMENT...14 REINSURANCE INTERMEDIARY AGREEMENT...14 INDEPENDENT AUDITOR AGREEMENT...14 INFORMATION TECHNOLOGY REPORT...15

3 STATUTORY DEPOSITS...15 FINANCIAL STATEMENTS PER EXAMINATION...15 ASSETS...16 LIABILITIES, SURPLUS AND OTHER FUNDS...17 STATEMENT OF INCOME...18 COMPARATIVE ANALYSIS OF CHANGES IN SURPLUS...19 COMMENTS ON FINANCIAL STATEMENTS...20 SUMMARY OF RECOMMENDATIONS...21 CONCLUSION...22

4 February 2, 2015 Kevin M. McCarty Commissioner Office of Insurance Regulation State of Florida Tallahassee, Florida Dear Sir: Pursuant to your instructions, in compliance with Section , Florida Statutes, Rule 69O , Florida Administrative Code, and in accordance with the practices and procedures promulgated by the National Association of Insurance Commissioners (NAIC), we have conducted an examination as of December 31, 2013, of the financial condition and corporate affairs of: MEDMAL DIRECT INSURANCE COMPANY 245 RIVERSIDE AVENUE, SUITE 550 JACKSONVILLE, FLORIDA Hereinafter referred to as the Company. Such report of examination is herewith respectfully submitted.

5 SCOPE OF EXAMINATION This examination covered the period of January 1, 2013, through December 31, The Company was last examined by representatives of the Florida Office of Insurance Regulation (Office) as of December 31, This examination commenced with planning at the Office on July 21, 2014, to July 25, The fieldwork commenced on July 30, 2014, and concluded as of February 2, This financial examination was a multi-state financial examination conducted in accordance with the Financial Condition Examiners Handbook, Accounting Practices and Procedures Manual and annual statement instructions promulgated by the NAIC as adopted by Rules 69O (4) and 69O , Florida Administrative Code, with due regard to the statutory requirements of the insurance laws and rules of the State of Florida. The Financial Condition Examiners Handbook requires that the examination be planned and performed to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company including corporate governance, identifying and assessing inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation and management's compliance with Statutory Accounting Principles and annual statement instructions when applicable to domestic state regulations. 1

6 All accounts and activities of the Company were considered in accordance with the risk-focused examination process. This report of examination is confined to significant adverse findings, a material change in the financial statements or other information of regulatory significance or requiring regulatory action. The report comments on matters that involved departures from laws, regulations or rules, or which were deemed to require special explanation or description. SUMMARY OF SIGNIFICANT FINDINGS Current Exam Findings The following is a summary of material adverse findings, significant non-compliance findings, or material changes in the financial statements noted during this examination. Actuarial Report Documentation The opining actuary did not describe the assumptions and methodologies used in the actuarial report with sufficient clarity that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary s work as presented in the actuarial report, as required in Paragraph 3.2 of Actuarial Standard of Practice No. 41. Schedule P Reconciliation The opining actuary s analysis did not include a Schedule P reconciliation, where there are some errors in the actuarial data presented in the report as compared to Schedule P data in accordance with Paragraph 7 of the Actuarial Opinion section of the NAIC s Annual Statement Instructions. 2

7 Actuarial Report Summary Exhibit The actuarial report did not contain an exhibit summarizing the results of the analysis and comparing them to reserves booked by the Company, as required in Paragraph 7 of the Actuarial Opinion section of the NAIC s Annual Statement Instructions. In addition, the results presented in the actuarial report, when summarized, do not reconcile to the amount represented as the actuary s point estimate in the Actuarial Opinion Statement ( AOS ). Prior Exam Findings There were no findings, exceptions or corrective action to be taken by the company for the examination as of December 31, SUBSEQUENT EVENTS During 2014, Integro Insurance Brokers, Ltd. replaced Lockton as the Company s reinsurance Intermediary. The Company received Certificates of Authority to write business in the states of Illinois, Missouri and Ohio during HISTORY General The Company was incorporated in Florida on June 14, 2010, and commenced business on June 17, 2010, as MedMal Direct Insurance Company. 3

8 The Company was party to Consent Order CO filed June 10, 2010, regarding the application for the issuance of a Certificate of Authority. The Company was in compliance with the Consent Order. The Company was authorized to transact Medical Malpractice insurance coverage in Florida on June 17, 2010 and continued to be authorized as of December 31, The Company was authorized to transact Casualty coverage in Georgia, Texas, and North Carolina on December 31, Subsequent Event: The Company received a Certificate of Authority to write business in the States of Illinois, Missouri and Ohio during The Bylaws were not amended during the period covered by this examination. The Articles of Incorporation were amended on March 14, 2013, which changed the par value from $1 per share to $.50 per share. Subsequent Event: The Bylaws were amended on March 24, 2014 to allow for the separation of roles of the President and Chief Executive. Dividends to Stockholders The Company did not declare or pay any dividends during the period of this examination. Capital Stock and Capital Contributions As of December 31, 2013, the Company s capitalization was as follows: Number of authorized common capital shares 10,000,000 Number of shares issued and outstanding 9,500,360 Total common capital stock $4,750,180 Par value per share $0.50 4

9 Control of the Company was maintained by MedMal Direct Insurance Group, LLC who owned 100% of the stock issued by the Company, who in turn was 100% owned by Physicians Trust, LLC, a Florida corporation. Surplus Notes The Company did not have any surplus notes during the period of this examination. Acquisitions, Mergers, Disposals, Dissolutions, and Purchase or Sales Through Reinsurance The Company had no acquisitions, mergers, disposals, dissolutions and purchase or sales through reinsurance during the period of this examination. CORPORATE RECORDS The recorded minutes of the Shareholder(s), Board of Directors (Board) and certain internal committees were reviewed for the period under examination. The recorded minutes of the Board adequately documented its meetings and approval of Company transactions and events, in compliance with the NAIC Financial Condition Examiners Handbook adopted by Rule 69O , Florida Administrative Code, including the authorization of investments as required by Section , Florida Statutes. Conflict of Interest The Company adopted a policy statement requiring periodic disclosure of conflicts of interest in accordance with the NAIC Financial Condition Examiners Handbook adopted by Rule 69O , Florida Administrative Code. 5

10 MANAGEMENT AND CONTROL Management The annual shareholder meeting for the election of directors was held in accordance with Section , Florida Statutes. Directors serving as of December 31, 2013, were: Directors Name and Location Carter Byrd Bryan Jacksonville, Florida Timothy Robert Bone Jacksonville, Florida Philip Butler Ball Jacksonville, Florida Michael John Wallace Saint Johns, Florida Christopher McNeill Ball Jacksonville, Florida Principal Occupation Director MedMal Direct Insurance Company President MedMal Direct Insurance Company Chief Executive Officer MedMal Direct Insurance Company Vice President and Chief Financial Officer MedMal Direct Insurance Company Chief Executive Officer Wingard Creative In accordance with the Company s bylaws, the Board appointed the following senior officers: Senior Officers Name Phillip Butler Ball Timothy Robert Bone Michael John Wallace Carter Byrd Bryan Title Chief Executive Officer President Vice President and Chief Financial Officer Chairman 6

11 The Company maintained an audit committee, as required by Section (8) (c), Florida Statutes. Affiliated Companies The latest holding company registration statement was filed with the State of Florida on February 26, 2013, as required by Section (1), Florida Statutes. An organizational chart as of December 31, 2013, reflecting the holding company system, is shown below. Schedule Y of the Company s 2013 annual statement provided a list of all related companies of the holding company group. MEDMAL DIRECT INSURANCE COMPANY ORGANIZATIONAL CHART DECEMBER 31, 2013 PHYSICIANS TRUST, LLC 100% MEDMAL DIRECT INSURANCE GROUP, LLC 100% MEDMAL DIRECT INSURANCE COMPANY 7

12 The following agreements were in effect between the Company and its affiliates: Service Agreement The Company entered into a Service Agreement on June 11, 2010 with the MedMal Direct Insurance Group, LLC whereby personnel was provided to perform certain services for the benefit of the Company, including but not limited to, sales and marketing, accounting and financial reporting, operations and regulatory. The Company paid the MedMal Direct Insurance Group, LLC a fee equal to one hundred and fifteen percent (115%) of the actual compensation and related personnel costs incurred as a result of providing these services to the Company. FIDELITY BOND The Company maintained fidelity bond coverage up to $1,000,000 with a deductible of $50,000, which reached the suggested minimum as recommended by the NAIC. The coverage was effective for the period December 1, 2012 through December 1, PENSION, STOCK OWNERSHIP AND INSURANCE PLANS The Company had no employees and therefore no pension, stock ownership or insurance plans. TERRITORY AND PLAN OF OPERATIONS The Company was authorized to transact insurance in the following states: Florida Texas Georgia North Carolina 8

13 The Company received a Certificate of Authority to write business in the States of Illinois, Missouri and Ohio in Treatment of Policyholders The Company established procedures for handling written complaints in accordance with Section (1) (j), Florida Statutes. The Company maintained a claims procedure manual that included detailed procedures for handling each type of claim in accordance with Section (1) (i) 3a, Florida Statutes. COMPANY GROWTH The Company commenced writing business in June of The Company experienced significant growth in written and earned premiums during The Company s operating results improved during 2013, as they experienced an underwriting gain of $107,120 as compared to the net underwriting losses of $1.14 million in 2012, which was primarily attributable to start-up costs and expenses related to the continued expansion into new areas. The Company marketed directly to prospects through the internet, mailing, referrals, seminars, conventions, meetings and other means of direct marketing. In 2013, the Company wrote business in Florida, Georgia, and Texas. With the expansion into new states and time to gain market share in all states, the Company anticipates continued significant premium growth over the next several years. 9

14 Profitability of Company The following table shows the profitability trend (in dollars) of the Company for the period of operations, as reported in the filed annual statements Premiums Earned 9,532,989 6,268,821 2,368,062 Net Underwriting Gain/(Loss) 107,120 (1,142,281) (1,436,562) Net Income (Loss) 773,046 (577,768) (1,067,195) Total Assets 22,934,956 17,468,994 9,114,314 Total Liabilities 12,484,473 8,547,915 3,380,787 Surplus As Regards Policyholders 10,450,483 8,921,079 5,733,527 LOSS EXPERIENCE Earned premiums increased from $6,268,821 in 2012 to $9,532,989 in 2013, which was an increase of 52%. Incurred Losses and Loss Adjustment Expenses increased from $4,074,090 in 2012 to $5,676,566 in 2013, which was an increase of 39%. The opining actuary did not describe assumptions and methodologies used in the actuarial report with sufficient clarity that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary s work as presented in the actuarial report, as required in Paragraph 3.2 of Actuarial Standard of Practice No. 41. The opining actuary s analysis did not include Schedule P reconciliation, where there are some errors in the actuarial data presented in the report as compared to Schedule P data in 10

15 accordance with Paragraph 7 of the Actuarial Opinion section of the NAIC s Annual Statement Instructions. The actuarial report did not contain an exhibit summarizing the results of the analysis and comparing them to reserves booked by the Company, as required in Paragraph 7 of the Actuarial Opinion section of the NAIC s Annual Statement Instructions. In addition, the results presented in the actuarial report, when summarized, do not reconcile to the amount represented as the actuary s point estimate in the Actuarial Opinion Statement ( AOS ). REINSURANCE The reinsurance agreements reviewed complied with NAIC standards with respect to the standard insolvency clause, arbitration clause, transfer of risk, reporting and settlement information deadlines. Assumed The Company did not assume any reinsurance during the period of this examination. Ceded The Company ceded risk through an excess of loss reinsurance agreement with clash coverage to various Lloyd s Syndicates in order to limit its financial exposure to large claims by using Lockton Re, LP as its reinsurance intermediary. The treaty period covered claims made from March 1, 2011 through March 1, Under the per risk excess of losss coverage, the reinsurers paid up to $750,000 per loss insured, in excess of $250,000. Under the clash coverage, the reinsurers paid up to $500,000 per loss occurrence, in excess of $500,000. Each 11

16 loss occurrence under the clash coverage provision comprised at least three insureds. The reinsurance agreement provided for adjustable premiums based on ceded incurred losses. There were no ceded incurred losses during the year ended December 31, Subsequent events: During 2014, Integro Insurance Brokers, Ltd. replaced Lockton as the Company s reinsurance Intermediary. The reinsurance contracts were reviewed by the Company s appointed actuary and were utilized in determining the ultimate loss opinion. ACCOUNTS AND RECORDS The Company maintained its principal operational offices in Jacksonville, Florida. An independent CPA audited the Company s statutory basis financial statements annually for the years 2010, 2011, 2012 and 2013, in accordance with Section (8), Florida Statutes. Supporting work papers were prepared by the CPA as required by Rule 69O , Florida Administrative Code. The Company s accounting records were prepared using Intuit QuickBooks to support general ledger activity, cash collections and payables. Microsoft Dynamics was used for processing claims and underwriting. Microsoft Excel was used primarily for rating, but also to support general ledger entries, accounting calculations, fixed asset details, and other accounting functions. 12

17 Microsoft Dynamics was implemented as of June 12, 2013, and replaced QuickBooks as the financial system in use. In addition, the Company began using Clearwater Analytics on October 1, 2013 for the accounting of investments. The Company and non-affiliates had the following agreements: Custodial Agreement The Company utilized Merrill Lynch as its custodian during the period covered by this examination. The Company executed a custodian agreement on August 16, 2012 that met all requirements of Rule 69O , Florida Administrative Code. The agreement was in effect during the examination period. On September 23, 2013, the Investment Committee appointed BlackRock Investment Management, LLC, as a discretionary investment manager with full power and authority to transact purchases and sales of currencies, securities and other instruments subject to the limitations within the Company s investment policies. Lease Agreements On August 1, 2012, the Company executed a five year lease agreement for office space with PKY Fund II (Parkway Realty). Rent expense, under all lease agreements was $159,659 and $143,587 for years ending December 31, 2013 and December 31, 2012, respectively. 13

18 The Company subleased office space to an unaffiliated party, Bryan Group, effective August 1, 2010 which was terminated on July 31, Rental income related to the sublease agreement was $0 and $18,215 for the years ending December 31, 2013 and December 31, 2012, respectively. Information Technology Agreement The Company entered into an agreement with NetTech Consultants, Inc. (NetTech) on August 24, NetTech provided the Company with Information Technology services including performance, availability & predictive failure monitoring, patch monitoring & management, virus definition monitoring and management, systems administration, systems maintenance, emergency support, and monthly review meetings. The Company paid NetTech for the services on a specified fee schedule per device on a monthly basis. The Company entered into a new agreement with NetTech on August 1, Reinsurance Intermediary Agreement The Company entered into a reinsurance intermediary agreement with Lockton Re on March 1, 2012 that met the requirements of Section (4) (5), Florida Statutes. Subsequent event: During 2014, Integro Insurance Brokers, Ltd. replaced Lockton as the Company s reinsurance Intermediary. Independent Auditor Agreement The Company contracted with an external independent CPA firm to perform the annual audit of its financial statements as required by Rule 69O (7) (c), Florida Administrative Code. 14

19 INFORMATION TECHNOLOGY REPORT Tom Baxter, CPA, CFE, CFF, CGMA, CISA, CITP, IT Consulting of Baxter Enterprises, LLC, performed an evaluation of the information technology and computer systems of the Company. Results of the evaluation were noted in the Information Technology Report provided to the Company. STATUTORY DEPOSITS The following securities were deposited with the State of Florida as required by Section , Florida Statutes and with various state officials as required or permitted by law: Par Market STATE Description Value Value FL Cash $ 250,000 $ 250,000 TOTAL FLORIDA DEPOSITS $ 250,000 $ 250,000 GA Cash $ 25,002 $ 25,002 NC Cash 200, ,000 TX FFCB Bond, 0.44%, 10/16/2015 1,000, ,970 TX FNMA Note, 0.48%, 11/25/2015 1,000,000 1,001,240 TOTAL OTHER DEPOSITS $ 2,225,002 $ 2,226,212 TOTAL SPECIAL DEPOSITS $ 2,475,002 $2,476,212 FINANCIAL STATEMENTS PER EXAMINATION The following pages contain financial statements showing the Company s financial position as of December 31, 2013, and the results of its operations for the year then ended as determined by this examination. There were no adjustments made as a result of the examination. 15

20 MEDMAL DIRECT INSURANCE COMPANY Assets DECEMBER 31, 2013 Per Examination Per Company Adjustments Examination Bonds $14,199,163 $14,199,163 Stocks: Common 2,009,644 2,009,644 Preferred 271, ,071 Cash and Short-Term Investments 2,944,539 2,944,539 Agents' Balances: Uncollected premium 2,746,301 2,746,301 Investment income due & accrued 76,899 76,899 Net defered tax asset 669, ,252 Aggregate write-in for other than invested assets 18,087 18,087 Totals $22,934,956 $0 $22,934,956 16

21 MEDMAL DIRECT INSURANCE COMPANY Liabilities, Surplus and Other Funds DECEMBER 31, 2013 Per Examination Per Company Adjustments Examination Losses $5,972,774 $5,972,774 Loss adjustment expenses 1,615,757 1,615,757 Other expenses 585, ,855 Taxes, licenses and fees 40,965 40,965 Unearned premiums 4,708,968 4,708,968 Advance premium 633, ,954 Ceded reinsurance premiums payable (1,111,704) (1,111,704) Current federal income tax payable 3,409 3,409 Payable to affiliates 34,495 34,495 Total Liabilities $12,484,473 $0 $12,484,473 Common capital stock $4,750,180 $4,750,180 Gross paid in and contributed surplus 7,149,820 7,149,820 Unassigned funds (surplus) (1,449,517) (1,449,517) Surplus as regards policyholders $10,450,483 $0 $10,450,483 Total liabilities, surplus and other funds $22,934,956 $0 $22,934,956 17

22 MEDMAL DIRECT INSURANCE COMPANY Statement of Income Underwriting Income DECEMBER 31, 2013 Premiums earned $9,532,989 Deductions: Losses incurred $3,668,912 Loss expenses incurred 2,007,655 Other underwriting expenses incurred 3,749,302 Total underwriting deductions $9,425,869 Net underwriting gain or (loss) $107,120 Investment Income Net investment income earned $359,624 Net realized capital gains or (losses) 321,711 Net investment gain or (loss) $681,335 Other Income Net gain or (loss) from agents' or premium balances charged off $0 Finance and service charges not included in premiums 0 Total other income $0 Net income before dividends to policyholders and before federal & foreign income taxes $788,455 Dividends to policyholders 0 Net Income, after dividends to policyholders, but before federal & foreign income taxes $788,455 Federal & foreign income taxes 15,409 Net Income $773,046 Capital and Surplus Account Surplus as regards policyholders, December 31 prior year $8,921,079 Net Income $773,046 Change in net unrealized capital gains or (losses) (233,472) Change in net deferred income tax (112,857) Change in non-admitted assets (97,313) Capital changes: Paid-in 120 Transferred to surplus (4,750,060) Surplus Adjustment: Paid-in 5,949,940 Change in surplus as regards policyholders for the year $1,529,404 Surplus as regards policyholders, December 31 current year $10,450,483 18

23 A comparative analysis of changes in surplus is shown below. MEDMAL DIRECT INSURANCE COMPANY Comparative Analysis of Changes in Surplus DECEMBER 31, 2013 The following is a reconciliation of Surplus as regards policyholders between that reported by the Company and as determined by the examination. Surplus as Regards Policyholders December 31, 2013, per Annual Statement $10,450,483 INCREASE PER PER (DECREASE) COMPANY EXAM IN SURPLUS ASSETS: No Adjustment 0 LIABILITIES: No Adjustment 0 Net Change in Surplus: 0 Surplus as Regards Policyholders December 31, 2013, Per Examination $10,450,483 19

24 COMMENTS ON FINANCIAL STATEMENTS Liabilities Loss and Loss Adjustment Expenses $7,588,531 An outside actuarial firm appointed by the Board of Directors rendered an opinion that the amounts carried in the balance sheet as of December , made a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company. The Officer s consulting actuaries R. Glenn Taylor, ACAS, MAAA, Brent Sallay, FCAS MAAA, and Solomon Frazier, ACAS, ASA, MAAA consulting actuaries of Taylor-Walker Associates Inc., reviewed the loss and loss adjustment expense work papers provided by the Company and they were in concurrence with this opinion. Capital and Surplus The amount of Capital and Surplus reported by the Company of $10,450,483, exceeded the minimum of $4,000,000 required by Section , Florida Statutes. 20

25 SUMMARY OF RECOMMENDATIONS Actuarial Report Documentation The examining actuary recommends that the opining actuary describe assumptions and methodologies used in future actuarial reports with sufficient clarity that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary s work as presented in the actuarial report, as required in Paragraph 3.2 of Actuarial Standard of Practice No. 41. Schedule P Reconciliation For examination purposes, the examining actuary recommends that the opining actuary include a Schedule P reconciliation in future analyses, as required in Paragraph 7 of the Actuarial Opinion section of the NAIC s Annual Statement Instructions. Actuarial Report Summary Exhibit For examination purposes, the examining actuary recommends that the actuary add the required summary exhibit to future actuarial reports, and ensure consistency between the AOS and the summarized results contained in the summary exhibit of the report. 21

26 CONCLUSION The insurance examination practices and procedures as promulgated by the NAIC have been followed in ascertaining the financial condition of MedMal Direct Insurance Company as of December 31, 2013, consistent with the insurance laws of the State of Florida. Per examination findings, the Company s surplus as regards policyholders was $10,450,483, which exceeded the minimum of $4,000,000 required by Section , Florida Statutes. In addition to the undersigned, Roshi Fekrat, CPA, CFE, CIA, MCM, Examiner In Charge, of Global Insurance Enterprises, Inc., and Patricia Casey Davis, CPA, CFE. CMA, CIA, CRMA, CICA, Examination Manager, of INS Companies, participated in the examination. George Brown, CFE, CIA, MCM and Dennis Kluk, CFE, MCM, Participating Examiners, of Global Insurance Enterprises, Inc. also participated in the examination. Additionally, Brent Sallay, FCAS MAAA, R. Glenn Taylor, ACAS, MAAA, and Solomon Frazier, ACAS, ASA, MAAA, consulting actuaries of Taylor-Walker Associates Inc. and Tom Baxter, CPA, CFE, CFF, CGMA, CISA, CITP, IT Consulting of Baxter Enterprises, LLC are recognized for participation in the examination. Respectfully submitted, Lamar Downs, CPA Deputy Chief Examiner Florida Office of Insurance Regulation 22